Foreign Direct Investment, popularly known as FDI, is the investment by a business organization from one country into another to establish ‘lasting interest.’ The term ‘lasting interest’ means acquiring a minimum of 10% of voting rights in another business organization. For instance, Ola’s (an Indian ridesharing company) undertaking to open another headquarters in Sydney, Australia, can be taken as bringing FDI into Australia. Reinvestment of profits from overseas business operations and intra-organizational loans and borrowings to overseas subsidiaries also come under FDI.

 

The scope of FDI is not limited to the transnational flow of capital. It also includes the transnational movement of economic elements similar to capital, such as human skills, technology, and business processes.

 

Anyway, there is a significant difference between FDI and FPI. FPI or Foreign Portfolio Investments means the purchasing of equity of international companies. In short, FPI includes only equity infusion rather than the establishment of ‘lasting interest.’

 

FDI can be both Greenfield and Brownfield in acquiring ‘lasting interest.’ In Greenfield FDI, an enterprise creates its subsidiary in another country and builds its business operations from the bottom up. Through Brownfield FDI, a business organization expands its business operations through transnational mergers, acquisitions, and joint ventures by leasing or purchasing existing production facilities.

 

Here we point out the top nine ways foreign direct investments benefit the nation that attracts FDI.

 

1. Boosts Employment and Economic Growth

 

The creation of employment is the most valuable advantage of FDI. It is also one of the significant reasons a nation, particularly a developing one, strives to attract FDI from other countries. FDI also boosts the manufacturing and the services sectors of a nation. Along with creating more jobs, FDI also helps reduce unemployment among the educated youth and creates more working opportunities for skilled and unskilled labor. Increased employment translates to enhanced incomes, purchasing power, and increased tax revenue for the government, boosting a country’s overall economic growth.

 

2. The Development of Human Resources

 

Human resources development is one of the less obvious and often understated advantages of FDI. In simpler terms, it refers to a country’s workforce’s knowledge, skills, and competence. Human resource development can be efficiently carried out through education, training, and experience. Moreover, once developed and honed, human resources are mobile as they can train the same in other companies, creating a ripple effect. 

 

3. Development of the Backward Areas of a Country

 

FDI is powerful enough to transform the backward areas of a developing nation into income-creating yet employment-generating industrial centers. This process, in turn, positively influences the socio-economic situations of the regions.

 

4. Access to Latest Technology and Funds

 

The business that receives FDI also gets access to the latest technologies, operational business practices, and funds from various sources worldwide. Eventually, the infusion of the latest, enhanced technologies and methods result in their assimilation into the local economy, resulting in improved efficiency in production and distribution.

 

5. Enhanced Exports

 

Not all goods and services produced in an industry supported by FDI are for domestic consumption. In addition, most of these products and services have global demand for sheer economic reasons. Moreover, creating Export Oriented Units (EOUs) and Special Economic Zones (SEZs) further assist FDI investors in boosting their export-import operations from other countries.

 

6. The Stability of Currency Exchange Rate

 

The constant flow of FDI into a nation boosts the nation’s foreign exchange reserves. It helps the country’s central bank maintain a balanced reserve of foreign exchange and ensures stable currency exchange rates.

 

7. Stimulates Grass-Root Level Economic Development

 

Apart from being a great source of capital inflows and higher revenues for a country, FDI brings grass-root level economic development. It is another understated advantage of FDI.

 

For instance, the construction of factories and other industrial physical structures use local labor, materials, and equipment. Once the construction is over, the factory will employ more local people and utilize local materials and services further. These additional jobs in a local community enhance their purchasing power and increase tax revenue for the government. And, the government can utilize the increased income to improve infrastructure and create additional jobs.

 

8. Enhanced Capital Flow

 

Most countries across the world have unbalanced economic structures. FDI facilitates the sharing of resources among nations with mutual benefits. FDI generates more capital inflow to a country and helps the countries with limited domestic resources. Similarly, the countries with limited opportunities to raise funds in global capital markets can lean on FDI for economic growth.

 

9. Develops a Competitive Market

 

FDI facilitates the entry of international companies into the domestic marketplace, thereby developing a competitive marketplace by breaking domestic business monopolies. A healthy competitive marketplace compels companies to continuously enhance their products and services, decrease prices, and foster innovation. It also welcomes consumers into a market that has a broader range of competitively innovative yet low-priced products and services.

 

For instance, a multinational corporation ventures into FDI in India to access new markets and industrial space where the corporation can expand its business operations, thereby boosting its global market influence. In addition, FDI allows the company to access limited natural resources such as fossil fuels and precious metals and other assets such as labor, management expertise, and technologies.

 

There are two more ways FDI can benefit a business organization. Firstly, it helps a business organization to lower its cost of production. A company can access cheaper natural and human resources by dealing directly with the source of raw materials rather than purchasing them from third parties. Secondly, a company that undertakes FDI operations can avail various tax benefits. The tax advantages occur only if the country that sponsors FDI allows a tax deduction on foreign revenue or when the beneficiary country allows tax deductions and benefits for companies attracting FDI in that country. Additionally, all these tax benefits become a reality if the beneficiary country has more beneficial tax regulations than the country that sponsors FDI.

 

– Justin Raj

 

Alpha Research Team